Inflation hits record high of 7.5 per cent in countries using euro

Inflation hit a record in April for the 19 countries that use the euro as skyrocketing fuel prices boosted by the war in Ukraine weigh on the region's economic recovery from the coronavirus pandemic, it was reported on Friday. Annual inflation reached 7.5 per cent for the month, topping the old record of 7.4 per cent from March, statistics agency Eurostat said on Friday. The April figure was the sixth consecutive record reported for the eurozone.

Eurostat said energy prices jumped 38 per cent, an indication of how Russia's invasion of Ukraine is affecting the eurozone's 343 million people. The jump in European prices reflects some of the same factors that pushed US annual inflation to 8.5 per cent in March, the highest since 1981.

Fears that the war may lead to an interruption of oil or gas supplies from Russia, the world's largest oil exporter, have pushed up prices for oil and natural gas. The uncertainty comes on top of rebounding global demand during the recovery from the pandemic and a cautious approach to increasing production from oil cartel OPEC and allied countries, including Russia.

Bottlenecks in supplies of raw materials and parts have also contributed to higher prices. Governments as well as households are feeling the effects of high inflation. Germany is dropping a charge for supporting renewable energy on electric bills, saving a family of four around 300 euros (USD317) a year.

Germany's IG Metall industrial union is proposing an 8.2 per cent annual increase for the country's steel-workers going into wage talks. Worries about even higher heating, electricity and auto fuel prices are one factor holding back European governments from deciding to halt energy imports from Russia as part of the sanctions over the Kremlin's invasion of Ukraine.

“The war in Ukraine is a major setback for the eurozone's economic recovery,” said Tej Parikh, director in Fitch Ratings' economics team.

Inflation is also putting uncomfortable pressure on the European Central Bank to look at raising interest rates from record lows in coming months. Higher rates to quell inflation could also weigh on a recovery that has been shaken by the energy crunch, the war, and the latest outbreaks of COVID-19.

Eurostat said economic growth slowed to 0.2 per cent in the first three months of the year as voluntary and government restrictions during the spread of the highly contagious omicron variant of the coronavirus joined with higher inflation to hold back demand as people made less use of in-person services. The first quarter figure was down from 0.3 per cent in the last three months of 2021.

Among major European economies, Germany grew 0.2 per cent, avoiding a recession after output fell 0.3 per cent at the end of 2021. France stagnated at zero growth as government restrictions during the omicron wave hurt activity. Italy's economy shrank 0.2 per cent as exports declined.

The war, which started on February 24, more than halfway through the quarter, is likely to weigh on growth during the coming months. “Rising inflation and the fallout from the Ukraine war mean that GDP is likely to contract” in the second quarter, “while April's further big increase in core inflation strengthens the case for a July rate hike” by the ECB, Andrew Kenningham, chief Europe economist at Capital Economics, said.